What are the Qualitative Characteristics of Financial Reporting?

Relevance & Faithful Representation

Faithful RepresentationIncludes:Completeness - Nothing omitted that would impact the decision-making of a userNeutrality - Information is presented is without biasFree from Error - No material errors or omissions

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What are the Enhancing Qualitative Characteristics of Financial Reporting?

Comparability Verifiability Timeliness and Understandability

Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand

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How does Conservatism affect the recording of accounting transactions?

When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company

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What is an accrual?

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet

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What is a deferral?

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)

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What is recognition in accounting?

When an item is recorded and included in the financial statements

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Describe fair value with respect to an asset

The price you would receive if you sold the asset

Assumes asset is at its highest and best value

Assumes asset is sold at its most advantageous market to get the best price possible

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What market assumptions are made in a fair value assessment?

Buyer and Seller are not Related

Buyer and Seller are Knowledgeable

Buyer and Seller are able to transact - i.e. This isn't a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you're trying to value at $10M

Buyer and Seller are both motivated to buy/sell

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What items are included in a Level 1 input in the fair value hierarchy?

Price quotes or market prices

For example NYSE or NASDAQ

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What items are included in a Level 2 valuation input?

Interest rates

Prime rate

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What items are included in Level 3 inputs of the fair value hierarchy?